Compare and contrast the market structures of oligopoly and monopolistic competition.
Oligopoly is a market structure; monopolistic competition is another market structure. They compare in that each is a type of market structure. Both operate in markets with imperfect competition. Both have downward sloping demand curves due to price elasticity and substitution alternatives.
In monopolistic competition many firms within one industry compete against each other with essentially the same product but with each having distinctive characteristics. A well known example is restaurants in the food industry, all competing for diners while offering unique characteristics geared to market segments or to price point.
In contrast with this, in an oligopoly a few large firms dominate an industry, with perhaps a few small firms geared to niche or specialized market segments. These few large firms are identified and recognizable by market share concentration ratios. Gasoline suppliers in the fuel industry are a common example. Large gasoline giants, like the Exxon Mobil gasoline stations, have large market share concentration ratios while independent stations have small market share concentration ratios.
Firms in monopolistic competition have differentiated products, operate independently, and offer no barriers to new entrants. Imagine new entrants to the restaurant industry or to the hair salon industry. In contrast, firms in an oligopoly make minimal attempts to differentiate product (for clarification, think of drive-through restaurants as differentiated from high price-point restaurants); they operate through interdependence and have distinguishing pricing strategies as they decide to compete or collude, to be a first mover or a second mover; they have natural and artificial barriers to new entrants such as economies of large scale (natural) and predatory pricing (artificial).
In an oligopoly competitive market structure, few companies dominate. There may be other smaller or specialized companies but there will be few who dominate that particular industry. For instance, in the airlines industry British Airways and Air France are dominant in Europe but this does not mean other smaller airlines do not exist in the same market. In a monopolistic competitive industry, however, there are many firms or products that are closely competing and minimal barriers to entry.
The similarities between the two types of competitive markets include:
- Both oligopoly and monopolistic competitive markets offer the companies control over the market
- The industries that these two types can exist in are mostly large or enough to sustain their operations
The difference in oligopoly and monopolistic competitive markets include:
- In oligopoly the barriers are higher as compared to monopolistic competitive markets.
- In oligopoly competition, markets are dominated by a few while in monopolistic competition the market has many equal players.
The major similarity between these two is that firms in both can make economic profit. They both face downward sloping demand curves and both are price makers. Finally, it is possible for firms in both market structures to sell products that are differentiated.
The two are different in that monopolistic competition has many firms involved in it. This is a market structure made up of large numbers of small firms (restaurants are a good example) with relatively easy entry to the market. By contrast, oligopoly is a market structure made up of a very few large firms (auto makers are a good example) and entry to the market is very difficult.